Question

A company is considering providing its employees with a form of share-based compensation. the owner is trying to determine the best plan for the company's needs. in explaining to the owner the impact of share options, which of the following statements is true during the vesting period?

a) Share options impact the company's cash flow.
b) Share options negatively impact debt-to-equity ratios.
c) Share options impact net income
d) Share options do not align option holders' objectives with those of the company.

Answer 1

During the vesting period, share options do not impact a company's cash flow, debt-to-equity ratio, or net income but do align the objectives of option holders with the company, incentivizing performance for the company's growth.

Step-by-step explanation:

The question at hand is determining the truth about the impact of share options during the vesting period. It is important to clarify that during the vesting period:

• Share options do not have an immediate impact on the company's cash flow, as they are not yet exercisable and no cash is involved until the options are exercised after the vesting period.
• Share options do not directly impact the debt-to-equity ratio during the vesting period as the options have not been converted into equity yet.
• Share options typically do not impact net income until they are exercised, at which point the company may record related compensation expense.
• Share options actually align option holders' objectives with those of the company, as option holders benefit from the company's stock value increasing, providing an incentive for performance that is beneficial to the company's growth.

From the given statements, the correct answer is that share options align option holders' objectives with those of the company, as the goal of share-based compensation is to motivate the holders to work towards increasing the company's stock value, which benefits all stakeholders.